UBS: Expect significant improvement in Q3 earnings for share banks
UBS's China Financial Sector Research Head for Investment Banking, May Zhan, said that while loan growth further slowed, the decline in net interest income may be narrowed by the stabilization of the net interest margin. Fee income may remain weak as regulators guide fee cuts, but trading and investment income may still maintain good growth (average YoY growth of 30.4% in Q3). In addition, UBS expects tighter cost control to support profit growth as the room for further credit cost cuts is limited. Overall, UBS expects a more pronounced improvement in the performance of the third quarter for the NBFs.The NBFs and local banks seem more pro-cyclical, moving in line with the bull market, while the state-owned banks are more counter-cyclical. UBS believes that the stronger willingness of the Chinese government to support the real economy and the stock market in the next few years may create a slow bull market. Currently, due to some policy details still unclear, such as the strength of fiscal stimulus, and the uncertainty of the US election, UBS believes that the bank stocks in the H-share/A-share market will outperform, especially the big banks. The high dividend rate, "predictable" earnings and low valuation still make domestic bank stocks attractive.Zhan expects that the YoY growth of revenue, PPOP and net profit of the covered state-owned banks in Q3 2024 may improve to -1.9%, -1.7% and 0.4%, while the local banks' YoY growth may slow to 3.1%, 4.1% and 9.1% in Q3.Benefiting from lower funding costs and active asset structure adjustment, UBS expects the NIM of Chinese banks to further narrow sequentially, down 2bps in Q3 (down 3bps sequentially in Q2, down 20bps YoY), while the NIM of the NBFs may narrow sequentially by 2bps in Q3 (down 3bps sequentially in Q2, down 15bps YoY).Looking forward, Zhan said that the negative impact may come from the 50bps cut in the mortgage rates from the end of October, which may make the NIM in Q4 2024 only down 1 to 2bps. Most of the total impact of 5 to 6bps will be reflected in 2025, while the pressure of further LPR cuts will be added, but the deposit rates will be cut to offset the impact. Another downside risk may be the trading and investment income of banks, as the MTM investment income may be dragged down by the large bond sales and wealth management redemptions.With more measures to boost the stock market (including 500bn yuan swap facilities for non-bank financial institutions to provide liquidity for stock purchases) coming into effect, the investment sentiment in wealth management and bond markets still remains uncertain.